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Thoughts on Becoming a Financial Advisor

My post last week encouraging you not to hesitate to ask questions resulted (not at all surprisingly) in a great many questions from readers.

What did surprise me was that the most frequently asked-about topic wasn’t investing at all — at least not directly. People had lots of questions about working as a financial advisor. Specifically, they wanted to know:

Why I left the field despite still being very interested in investing,

How much of an advisor’s time is spent on sales work as opposed to actually working with clients, and

What I thought about working at Edward Jones as opposed to other firms.

Why I’m No Longer an Advisor

In short, the reason I quit working as an advisor is that I was not very successful at it. It didn’t take long for me to realize that I had a lot more fun when I was researching and learning about investing and tax planning than when I was networking, knocking on doors, or making phone calls.

But, as it turns out, reading books doesn’t bring in very many clients. And not-many clients means not-much income.

Are Advisors Salespeople?

As far as Edward Jones goes, yes, it’s definitely a sales position. Back when I went to work for them (2006), their website stated this fact very clearly, and the people involved in the recruiting process made sure to point it out as well. I’m not entirely sure why they’ve changed that.

To be clear though, the same thing applies to new financial advisors at other firms. When you’re new in the business, you have no existing clients. So, naturally, most of your time is spent trying to bring in clients. And that means sales-work.

[Exception: If you're able to find a position at a firm that currently has more clients than it can handle, your time would obviously be spent differently. My understanding, however, is that these positions are not exactly abundant.]

The difference between brokerage firms (like Jones) and fee-only firms is that at a brokerage firm your job is to sell investments (specifically, ones that pay a commission), whereas at a fee-only firm your job would be to sell the service — the planning itself.

Which Firm to Work For

Personally, I think the fee-only model does a better job of preventing conflicts of interest between the advisor and the client. Unfortunately, the biggest recruiters in the industry (i.e., large brokerage firms, banks, and insurance companies) use the commission-paid model for most of their business.

That leaves you with three options, each of which presents its own challenges:

Look for a position at a fee-only firm. (The challenge here being that such positions are more difficult to find.)

Start your own independent practice. (The challenge being that you have to pay the start-up expenses and you’ll be earning very little while you find clients.)

Go to work at a bank, brokerage firm, or insurance company, building your business in the most ethical way possible within that firm’s constraints, possibly with the intention of going independent later once you’ve built your client base.

Of course, all of the above comes with the caveat that this is the viewpoint of somebody who was only in the industry for approximately one year, worked for only one firm, and wasn’t particularly successful there. So if being a financial advisor is a career path you’re seriously considering, I’d definitely suggest getting other opinions as well.

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Comments

Great post Mike. I started “cold turkey” as a fee-only advisor in the late ’90s and like any business it is tough to start from scratch. I will say that I continue to love what I do and couldn’t think of a better career.

“Go to work at a bank, brokerage firm, or insurance company, building your business in the most ethical way possible within that firm’s constraints, possibly with the intention of going independent later once you’ve built your client base”

I just read a contract for an incoming planner at my office from his old firm (my employer and his employer are irrelevant)…and wow! That thing was air tight. They basically owned all his old clients, so be very careful accepting that first job.

At my office (again I am anonymous on here) you own your clients so you can come and go as you please, but a lot of brokerages are very very different.

And I would concur with Evan. Most companies are going to have you sign a non-compete agreement. After all, they are not going to want to put their time and resources into you, only to have you take off down the road.

We aren’t IAs, but do work help people with CDs. I was lucky enough to start with a few clients, but had to make tons and tons of cold calls to build my list. I’ve been here since 2000 and love meeting new people.

Mike, I think your assessment is pretty accurate. Like Evan and Chris said, I’m not sure I would count on #3. However, if you have a really good relationship with your clients, then the best ones will follow you out the door. The company can’t stop the clients from leaving and going to you. They just stop you from “taking” the clients…you just have to find a way to make it easy for your clients to find you after you leave.

I’m doing #2 now and it is a long road, but I’m enjoying it so far! I think you’d make an excellent advisor, and it may be fairly easy for you to start a business with the following you’ve developed online.

Thanks to the four of you for stopping by. I had a feeling I could count on a few advisors to provide additional thoughts.

Regarding being stuck via a contract, you all raise a very good point.

At Edward Jones, I remember thinking that the contract wasn’t super ironclad with regard to taking clients, but it did have a provision whereby you had to repay the firm for your licensing costs (at a $40,000 value if I recall correctly) if you left the firm within the first three years to use your license elsewhere. Of course, the specifics of the contract have likely changed in the years since. I just bring it up as another potential thing to look out for.

It has been known that going freelance and starting an independent practice entails a lot of hard work when starting up but the feeling of fulfillment is great when you start reaping the fruits of your labor.

Mike
I commend you on your blog; the following is in respect to the matter of becoming a financial advisor
The options include building a practice with other licensed advisors, who in turn help your business profit. As an independent agent I have this option in my company and agents who join me have this option, and so on. Building a book of clients in an agency with the view that you will eventually leave and take them with you is pretty unethical to start with. The discussion needs to be around what kind of business do you want, or whether you want a job.
Advising clients in financial services does not always mean just giving advice on investments, but should include planning and providing solutions for the most common needs in the various stages of life for a person/family; from insurance, tax planning, debt servicing and investing. Not having access to all the best financial products means a person is not a financial advisor but a sales person for a particular line of products, leaving the client to find other sales people to fulfill their other needs. This often leaves a client with exposure and risk, that a full service advisor would cover, or having too little diversification across the various vehicles that provide different tax benefits and investment options to the client because of the need to sell product instead of delivering service and solutions.
While no-one is perfect, having a broad range of financial advice seems to be better than a narrow focus on say insurance, or investments, only. Fee for service makes the advisor self-employed while working on a commission basis means the same thing. Building an agency and a client base means being closer to becoming a business and having the opportunity to walk away and still receive income as the business continues to generate revenue without you.
WFG is Canada’s largest independent broker of financial services and is also the only place a person can try the financial industry out for a nominal service fee, become licensed and develop an agency, or simply work on creating a book of clients; all the while offering a range of products and services from some of the best suppliers in the industry under the tutelage of experienced team members and co-workers with a vested interest in your success. The model allows the business owner to concentrate on the business while the products and services are available via top professionals in the various product fields. The key to success is in understanding the client to deliver the right solutions, that will get them to their goals, using strategies that not usually available to the individual unless they have a high net worth or have the knowledge to manage their own family requirements as many of your readers no doubt do.

Having started with #3, then transitioning to #2, and then starting my own #1, I can tell you that our industry, for the part is, broken.

You’re absolutely right…”Look for a position at a fee-only firm. (The challenge here being that such positions are more difficult to find.)”

These positions are hard to find and that much more competitive. But clearly, they are the only way to work with clients with no other agendas. Most starting level positions with fee-only firms are strictly salary, removing any potential conflicts of interest.

For me, I started with A.G. Edwards (now Wells Fargo). My payout was 40% of whatever I sold. Under the new payout grid (the last that that I was aware), your payout is only 20% for the first $10,000 in production. Anything above that is 50%.

So think of a newer advisor that “wants to do the right thing” and they have a chance of putting a sizable rollover into a fee-based investment model and make nothing up front OR put the money into a high commission paying product and be able to live comfortably for a month or two. I think it’s safe to say that not all advisors do the right thing.

That being said, I’m thankful for the time I had with my old firm. The experience is invaluable and without seeing how the “other side” works I never would have ventured on my own.

Luckily, I had worked there for 5 years, satisfying any non-compete clauses I had. As Evan had alluded to in the above comment, it’s my understanding that the contract periods are now longer and a lot more strict. Be sure to read the fine print!

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Hi. I'm Mike Piper, the author of this blog. I'm a CPA and the author of several personal finance books. The point of this blog is to show that investing doesn't have to be complicated.

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